The New Subsidy

It didn’t really surprise me in December when I learned that Google was buying AdMob, the leading mobile advertising platform. I was surprised, however, to learn that Apple had been in the discussions and possibly even lost a competitive bidding process. Why? Apple doesn’t make many acquisitions, and when it does, they tend to be about core technologies or engineering teams. Plus, Apple’s primary business model is hardware sales, so an ad platform didn’t make much sense.

The first week of the new year brought definitive word that Apple has purchased Quattro Wireless, a competing platform, for what has been reported to be in the $300 million range. The rumor that Apple was interested in AdMob seems far more likely now. But the two factors that made me question Apple’s interest in AdMod remain relevant to the Quattro deal.

There are at least three possible reasons Apple might buy a mobile advertising company. First, mobile advertising is clearly a growing business, particularly on devices like the iPhone. Second, because Apple owns the iPhone and controls the app distribution process, it might make sense to build ad delivery capability right into the iPhone SDK and iTunes App Store, as a premium or value-added service to developers. Include the right code in your app, ads will be automatically embedded, and you’ll make 70 percent of all ad revenue just like you do from app sales. With app sales, in-app purchasing, and advertising, Apple can now offer a 360-degree mobile app monetization solution. Third, mobile analytics can provide tremendous insights to Apple and its developer community about usage data, trends, and demographics.

There are two other possibilities that are perhaps less obvious, but far more interesting. One relates to a new device, the other to a competitive threat.

It is now widely expected that Apple will release a tablet-style computer at its media event scheduled for January 27. The Wall Street Journal has reported that Apple will discuss “mobile products” at the event, which suggests the event is about more than the rumored iSlate. Clearly, a mobile ad network falls into the mobile products category. And Apple has been rumored to be courting book, magazine and newspaper publishers to produce content for the new device. It wouldn’t be surprising if, during a round of meetings with publishers, Apple learned that an advertising platform would be a key requirement for their participation. The new content wrapper I expect to be included in Apple’s mobile products event — sort of an iTunes LP for traditional print publications — might very well include an integrated Quattro Wireless ad platform as a major enticement for publishers.

That last possibility is really intriguing to me, and has the potential to have a major disruptive force on the wireless industry. As rumors of the Google Nexus One first arose, there was significant speculation that it would be sold as an unlocked device for something between $199-599. On January 5, we learned that the new Android phone would be available in the U.S. on T-mobile immediately for $179 with a two-year contract, and $529 unlocked, and that it would be available later this year on Verizon, likely for similar prices. This means that the business model employed by the carriers and device manufacturers — in which carriers subsidize the cost of the hardware in exchange for a two-year service contract — remains intact. For now.

In launching the Nexus One, Google announced that it could only be purchased through the new Google phone store on the web. Which means that Google is effectively an authorized reseller of the carriers and gets paid a bounty for every contract customer they deliver. Consumers cannot get the Nexus One directly through the carriers. When Apple launched the iPhone, conventional wisdom was that it had rewritten the rules, but Google has taken it several steps further. Like Apple, it controls the hardware and software, and while Apple exerted significant influence on AT&T, you can still go directly through AT&T to get the iPhone. Not so with Google, who now has even greater leverage with the carriers in dictating terms.

In no way is Google beholden to the carriers. It can sell an unlocked phone for any price it wants. Google isn’t likely to sell the phone for a loss, so the low carrier-subsidized and higher unlocked prices make perfect sense. But Google can subsidize the phone another way. Since they control the hardware, software, and consumer relationship, they could easily offer an unlocked version of the phone at a very low price — perhaps even lower than the carrier price — by selling a version that features advertising delivered via its new AdMob platform. There are likely many people who would rather endure ads on their mobile devices than commit to a two-year contract. Now that Google has AdMob and a phone they completely control, it can conduct extensive research on the potential profitability of such an approach, while still collecting carrier subsidies. If the ads perform — and the bet here is that they do — Google could release not just an unlocked phone, but one that doesn’t even need the wireless carriers. Google Voice and Wi-Fi will do just fine in many instances, and Google could pull a WhisperNet for off-net needs.

Which leads us back to Apple. If Google offered the Nexus One and other Android phones at 3 price points — unlocked with no ads (highest), carrier subsidized, and ad subsidized (lowest) — it would be a huge competitive advantage. At the very least, Apple may need a similar ability to go head-to-head, something that Quattro may offer, should sales or market share suffer. And in the competitive arena, now that Google is selling a mobile device in direct competition to Apple, should Apple be required to allow Google Voice on the iPhone?